Impact of the $26 billion national mortgage settlement

The federal government and state attorneys general across the country recently secured a historic settlement with the country’s five largest home loan servicers in an attempt to address the home foreclosure crisis. But what does that mean to distressed homeowners in Northeast Georgia and the rest of our state?

Scotty Ball, a partner with Stewart, Melvin & Frost, specializing in residential and commercial real estate law.

Question: Can you explain the recent settlement with the nation’s big banks and what it addresses?

Scotty: It is a joint state and federal settlement that was reached in February 2012 with the nation’s five largest mortgage servicers:

  1. Ally/GMAC
  2. Bank of America
  3. Citi
  4. JPMorgan Chase
  5. Wells Fargo

In total, the dollar amount of the agreement was $26 billion, and it represents the largest multi-state civil settlement since the federal Tobacco Settlement of 1998. It provides relief to nearly 2 million current and former American homeowners affected by the foreclosure crisis.

This settlement is intended to aid the current housing market while addressing some of the bank practices of the past that supposedly led to the foreclosure crisis. One of the biggest areas reviewed as part of this settlement was the practice of “robo-signing,” in which banks submitted foreclosure documents that were hurried through the process without proper review and approval.

Question: How will the money from the settlement be directed?

Scotty: The money will be spent in two primary areas. Some homeowners who are struggling to keep up with their mortgage will have the principal on their loans reduced, while others whose mortgages are underwater (negative equity) will be allowed to refinance and lower their house payments under today’s lower interest rates.

The settlement also requires the five big banks (who represent more than 60 percent of the mortgage servicing market) to correct some of these controversial practices like robo-signing.

Another non-financial bonus of this settlement is the requirement that banks provide customers with one point of contact. This mandate addresses a complaint by distressed homeowners who have had difficulty working out their loan problems with the same bank representative throughout the process.

Question: In past interviews, you have pointed out some of the shortcomings of other mortgage relief programs by the federal government such as the Home Affordable Refinancing Program.  How far will this settlement go toward turning around the housing market?

Scotty: Earlier efforts such as the Home Affordable Refinancing Program (HARP) have indeed fallen short in the past. And this settlement is certainly not expected to be the magic silver bullet, but it should go a long way toward helping stem future foreclosures.

To give some perspective, approximately 4 million Americans have lost their homes to foreclosure since the beginning of 2007, and Georgia has been among the top 5 states with the most foreclosures.

Under this settlement, approximately 1 million homeowners nationwide will have their mortgage debt reduced by lenders or refinanced at lower rates. The average principal reduction is expected to be about $20,000.

In addition, another 750,000 people who lost their homes to foreclosure between September 2008 and the end of 2011 will each receive checks for up to $2,000 over the next three years as part of the required settlement.

This settlement affects a lot of homeowners; however, keep in mind that mortgages owned by the government’s housing finance agencies, Fannie Mae and Freddie Mac, will not be covered under the deal – and that basically excludes half of the nation’s mortgages. Some government officials are predicting that the settlement could spur existing federal programs and other banks to follow up with additional mortgage relief.

Question: How many homeowners will be affected in Georgia by the settlement?

Scotty: It’s too soon to say how many Georgians will benefit or even when the checks will be issued because the banks have up to three years to administer the requirements of the settlement.

However, Georgia’s share of the settlement will total about $814.7 million. The greatest share of this money will be going toward the write-down of balances. So, in our state, the biggest beneficiaries will be homeowners who are current on their mortgage payments but are “underwater” on their loans.

As a state, Georgia actually gets a proportionately higher share of the national settlement because it ranks nationally as one of the states with the most number of home foreclosures.

The two states with the highest rate of delinquent loans and underwater mortgages are Florida and California. Consequently, homeowners in those two states will receive more than half of the $26 billion settlement.

Question: So how does a homeowner who is struggling to pay their mortgage each month find out if they are eligible for this relief effort?

Scotty: First, you must have been a customer of Wells Fargo, Bank of America, JPMorgan Chase, Ally Financial (formerly GMAC) or Citigroup from January 2008 through the end of 2011.

If you qualify, representatives from one of these banks or an independent settlement administrator will contact you. You likely will get some written notification in the mail that you may be eligible for refinancing or a principal reduction.

There is an official website that provides many more details about the settlement – www.NationalMortgageSettlement.com. You also can directly call the lending institution that serviced your loan.

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